Mozambique is not in total chaos – yet it is facing challenges. There hasn’t been a currency collapse, hyperinflation, or a bank run. However, over the past decade, the key indicators of the nation’s economic health have noticeably declined.

A report from the IMF in early 2026 was very clear: public debt is at an unsustainable level, the external balance of payments is fragile, and policymakers have limited options. Since that time, tensions in the Middle East have disrupted supply chains and significantly raised global fuel prices. This situation presents a serious shock for smaller economies like Mozambique that rely heavily on imports.

My observations are drawn from over twenty years of experience supporting economic research and policy analysis in the country. Currently, I work under the Inclusive Growth in Mozambique program, focusing on tracking the country’s economic performance through studies involving businesses, students, and households.

The data tells a troubling story. For many Mozambicans, the decline in living standards over the last decade has led to increased poverty, unreliable public services, and a job market that offers limited decent opportunities – particularly for the youth.

My central argument is that simply surviving is not an acceptable solution. Without thoughtful reforms now and a deliberate shift towards growth and job creation beyond the extractive sectors – which employ most Mozambicans – the current pressures will worsen, leading to an inescapable and more severe economic correction.

A gradual squeeze

The country’s current condition is marked by precarious stagnation. Since the hidden debt crisis of 2016, real GDP growth outside the extractive sector has hovered around 2%, barely keeping pace with population growth. In per capita terms, the non-extractive economy has stagnated for a decade. Average real incomes, excluding mining, gas, and the public sector, have essentially remained flat.

Fiscal deficits ranging from 4-6% of GDP have increasingly relied on domestic banks for funding. However, as both the IMF and World Bank have warned, this financial model is nearing its breaking point. Banks can only sustain so much government debt before they reach their limit of willingness or ability to lend. When that happens, the government will face a tough choice: default, print more money, or make drastic cuts to spending. None of these options is without pain.

Read: Mozambique’s economy faced the steepest decline in seven years due to electoral turmoil.

These pressures are apparent. Over a year ago, the global rating agency S&P classified local-currency debt as ‘selective default’. This is a formal indication that the government failed to meet its original commitments to domestic creditors while still making payments.

By late 2025, arrears had extended to short-term treasury bills – government IOUs usually regarded as the safest investments in the domestic financial market. When a government struggles to repay even those, it indicates severe fiscal distress.

Moreover, a decade spent managing crises has hindered any meaningful discussion about growth.

The government’s wages and debt servicing dominate expenses, resulting in chronic underinvestment in essential areas such as infrastructure, education, and agriculture.

Schools and healthcare facilities are lacking in necessary resources, roads are deteriorating, and social protection systems have significantly weakened.

Payments under the basic social subsidy program have become irregular, with many elderly recipients receiving only partial payments. Poverty has intensified, with roughly two-thirds of the population now living below the poverty line.

Demographic pressures are increasing. Mozambique must accommodate approximately 500,000 new labor market entrants annually by 2030, yet the formal sector creates only a small portion of the jobs required.

Informal employment remains dominant, and without a substantial boost to growth, it will only rise. Each year of stagnation adds another group of youth to an already saturated labor market. Delays do not ensure stability – they lead to more significant and costly adjustments later.

The exchange rate dilemma

The metical has remained stable against the US dollar since 2021, but when factoring in inflation, it has appreciated over 20%, reducing the competitiveness of exports. Foreign exchange shortages are widespread. By late 2025, the parallel market premium had reached about 14%. Businesses report long, tiresome wait times to access foreign currency through official channels.

The policy response has been administrative: increasing exporter surrender requirements, tightening banks’ foreign exchange limits, and limiting international card usage. These measures only address the symptoms, exacerbating the existing misalignments.

The overvalued exchange rate imposes a tax on the non-resource economy. Recent fuel shortages and panic buying – partly due to importers’ challenges in obtaining foreign currency and price volatility – serve as a clear indication of rising costs.

The political landscape for adjustment

In reality, public sector jobs have become a form of social safety net for the urban middle class. Research indicates that approximately half of all university graduates find employment in the public sector, and holding a public sector job is one of the strongest predictors of escaping poverty.

The public sector wage bill reinforces political legitimacy, which is why efforts to cut discretionary 13th-month salary payments were quickly reversed when vital workers threatened to strike.

Adjusting the exchange rate presents a similar dilemma. A depreciation would raise costs for imported food and fuel, directly impacting urban families, and any price hikes would spur demands for wage increases. With recent memories of violence from the 2024 elections still fresh, there’s a strong inclination to maintain the status quo.

However, as pressures escalate, the risk of compounding distortions also rises. So far, the response has involved introducing new administrative restrictions, including import limitations, stricter capital controls, and preferential credit distribution.

The ongoing management of the fuel price crisis exemplifies this pattern. Instead of adjusting fuel prices in a timely manner, the government has kept them fixed, forcing distributors to address a growing deficit through supply rationing.

Each temporary fix may relieve immediate pressures but often aggravates underlying misalignments, pushes activities into informal markets, and restricts future options.

Viable pathways forward

Path 1: Muddle through and await gas revenues. This is the current path. Fiscal adjustments happen passively, dictated by funding limitations rather than strategic foresight. There is hope that LNG revenues will start rolling in by the early 2030s.

Mozambique’s Rovuma Basin contains an estimated 100 trillion cubic feet of recoverable natural gas – one of the largest discoveries globally in the last twenty years. Yet, as of now, only the Coral South platform is producing gas.

Even if the 2030 timeline is met, ongoing stagnation will further degrade public services, weaken institutions, and heighten social discontent – and another general election will need to be navigated. By the time resource revenues become available, the state might lack the capacity and public trust to utilize them effectively.

Path 2: Gradual, growth-focused adjustment. This is the most economically sound route but faces political challenges. The core idea: prioritizing the revitalization of non-extractive growth, even at the cost of short-term macroeconomic comfort. Essential components would include:

• A phased depreciation of the metical to restore competitiveness, supported by clear communication and enhanced social safety measures;
• Acknowledgment of temporarily higher inflation, accompanied by policies aimed at mitigating secondary effects instead of merely suppressing initial price changes;
• A fiscal framework emphasizing quality spending and revenue efficiency;
• Containment of the wage bill through hiring restrictions, attrition, and systematic payroll audits to eliminate ghost workers and undue payments;
• Re-engagement with external partners under a credible IMF program framework;
• An evidence-based and financially sustainable medium-term growth strategy that targets agricultural productivity, labor-intensive exports, and a consistent regulatory and macroeconomic environment.

Path 3: Forced correction. If external shocks worsen, a significant adjustment may be suddenly mandated – involving tumultuous shifts in the exchange rate, abrupt fiscal contractions, and potential stress in the banking sector. The longer gradual adjustments are postponed, the more likely this scenario becomes.

Read: TotalEnergies revitalizes $20bn Mozambique plan, Noticias reports.

The narrow path ahead

There are no simple solutions. Every adjustment will generate visible opposition, while the advantages remain uncertain, postponed, and diluted.

However, one priority emerges clearly: fostering growth beyond extractive industries. Without such growth, fiscal consolidation becomes counterproductive, the creation of jobs will remain significantly inadequate, and social tensions will only rise. Stabilization pursued in isolation or at the expense of growth could lead to unfavorable outcomes.

This growth strategy must be grounded in data, evidence, and open discussions. Mozambique has no shortage of projects or initiatives, but it has consistently failed to leverage rigorous data to identify what drives productivity and job creation.

The window for a controlled, policy-driven adjustment is closing rapidly. The alternative does not promise stability; instead, it leads to adjustments under much harsher conditions at a higher cost.

Sam Jones, senior research fellow, World Institute for Development Economics Research (UNU-WIDER), United Nations University

This article is republished from The Conversation under a Creative Commons license. Read the original article.